The Fraud Triangle has been used as a model to explain the fraud phenomenon as the first step in preventing its occurence. This Fraud Triangle consists of the following three elements:
- Opportunity: presents itself when a person sits in a position of trust in a community which affords the potential fraudster with access (i.e. to the financial books and records) that is not available to outsiders.
- Pressure: presents itself when outside forces wreak havoc on the potential fraudster. This pressure is usually economic and usually arises in the form of a job loss, divorce, death or illness of a family member, gambling or other addiction problem. Some red flags evidencing the pressure side of the Fraud Triangle are a lavish lifestyle which does not fit the fraudster's income level or an employee who is very secretive and never takes a day off in years.
- Rationalization: allows the fraudster to avoid seeing himself or herself as a criminal who is stealing money from people. Instead the fraudster may see his or her actions as simply righting hte wrongs of the universe. Typical fraudster thinking in this regard usually falls along these lines: "I am overworked and underpaid so this balances things out" or "I am just borrowing those funds and will return them at a later date" or "They'll never notice, they have so much money".
Here are some things you can do to protect your community:
- Always have a system of checks and balances in place. Require two signatures on your checks even if your bank will accept only one. Your internal association policy should still require two signatures and directors should never sign a blank check.
- Always have more than one set of eyes on your books. No oversight of the person handling your association's books and an overly informal operation can set the stage for fraud.
- Always properly screen employees in advance to weed out potential fraudsters. Some instances of association fraud involved collusion between association employees (in one instance the landscapers submitted false invoices for payment to the bookkeeper whereupon they split the amounts paid). If an association employee pushes you to hire people he or she knows, do your homework first. When collusion amongst employees is present, the opportunity for a loss is multiplied by three!
- Make sure your bank provides duplicate statements directly to someone else other than the person handling your books. Why do this? A case out of Michigan dealt with a bookkeeper who received the bank statements and then cooked up a duplicate set with new numbers on her home computer to present to the board. Having dual statements sent out would have prevented this fraud.
- If you have an association credit card, keep the limits very low. Always check receipts against the statement and scrutinize receipts submitted for reimbursement to see if any personal or odd items are included in the reimbursement request.
- Do not allow owners to make payments in cash or by checks made payable to anyone other than the association in order to avoid skimming.
- Make sure your association's accountant reconciles your bank statements and never relies solely on bank statements provided to him or her.